MARC has affirmed its MARC-1_IS and AA-_IS ratings on Northport (Malaysia) Bhd’s (Northport) Islamic Commercial Papers (ICP) Programme and Islamic Medium-Term Notes (IMTN) Programme respectively. The outlook on the ratings is stable. The ratings affect the outstanding amount of RM450 million as at December 31, 2017 under the rated programmes which have a combined limit of RM1.5 billion.

Northport operates two ports, namely North Port (mainly container and conventional services) and Southpoint (conventional cargo services) in Port Klang. It is strategically positioned as a key local gateway and is well-connected to major highways, rail networks and airports. The ratings incorporate Northport’s position as a key domestic port operator, the adequate credit metrics and commendable operational efficiency. Moderating the ratings are increasing competitive pressures and susceptibility of its performance to global trade growth. Additionally, MARC remains concerned over Northport’s limited free cash flow (FCF) generation arising from increasing capital expenditure (capex) and sizeable dividend payout. Since 2013, Northport has completed works on wharves 16, 8A and 8. Currently, Northport is embarking on plans to upgrade and replace existing quay cranes and trailers. Over the next five years, Northport has budgeted approximately RM440.4 million for its capex.

Northport has been operating under an interim privatisation agreement based on the terms and conditions of the 1992 Privatisation Agreement. However, this interim agreement will be superseded by a new privatisation agreement (NPA). MARC views the NPA as credit positive because it ratifies Northport as the sole licence holder of North Port and Southpoint. The rating agency believes the signing of the NPA will add momentum to Northport’s existing renewal and rehabilitation of its infrastructure assets.

Northport registered a stable container throughput of 1.57 million twenty-foot equivalent (TEU) in 6M2017. In the non-container segment, the 18.0% growth in dry bulk cargoes tempered the 7.7% decline in the break bulk and liquid bulk cargoes. Operational revenue rose by 3.5% y-o-y to RM349.6 million, driven by its container volume which accounted for 70.8% of operational revenues. The higher container handling throughput volume contribute to the increase in Northport’s operating profit and pre-tax profit to RM70.6 million and RM64.3 million respectively. Furthermore, the y-o-y continued realisation of cost and operational synergies led to a better operating profit before interest, tax, depreciation and amortisation (OPBITDA) margin of 33.3% (6M2016: 32.9%).

In 6M2017, Northport’s operating cash flow (CFO) improved to RM108.7 million (6M2016: RM103.8 million). However, the higher capex and dividend payouts have further widened its free cash flow deficit to negative RM166.7 million. As at end-December 2017, Northport’s outstanding borrowings stood at RM450 million following its recent drawdown of RM100 million on December 4, 2017 to finance its capex requirements. If Northport further drawdown an additional RM100 million, the proforma finance-to-equity ratio (FER) and debt-to-OPBITDA are expected to increase to 0.50 times and 2.35 times respectively (2016: 0.32 times; 1.49 times).

The stable outlook reflects MARC’s expectations that the synergistical relationship with sister ports will contribute positively to Northport’s operating performance. Downward pressure on the ratings may occur if there is a cash flow generation mismatch to its financial obligations that could lead to an increase in debt-to-OPBITDA beyond 3.5 times, OPBITDA return on assets to decline below 7.5% and/or CFO debt coverage to fall below 0.5 times.

Contact:
David Lee, +603-2717 2955/ david@marc.com.my.